The new GOP leadership of the House of Representatives accomplished its most anticipated objective in the second week of the 112th Congress, when three Democrats joined all 242 Republicans in approving a repeal of last March’s health care reform, the Patient Protection and Affordable Care Act. While this largely symbolic effort was defeated on Wednesday night by the Democratic majority in the Senate, the earlier decisive House vote hardly bodes well for the law’s prospects down the road, especially if it remains unpopular with the public.
Yet, a more immediate concern for Obamacare’s supporters is the threat that the law’s individual mandate, which imposes a fine on most citizens and legal residents who fail to purchase a certain amount of health insurance by 2014, will be found unconstitutional. More than half of the state governments have joined a lawsuit against the provision. While two federal judges have upheld the mandate, U.S. District Judge Henry E. Hudson of Virginia ruled in December that it lies outside the scope of Congress’s enumerated powers, and Judge Roger Vinson of Pensacola, Fla. issued a similar decision on Jan. 31. The final word is likely to come from the Supreme Court, whose ideological balance leaves the real possibility that the individual mandate could be struck down. If that happens, PPACA’s strategy for making insurance affordable will become untenable.
Frequently noted during the health care debate was the population of uninsured Americans—50.7 million as of 2009—many of whom cannot afford coverage and are denied care: A recent Harvard Medical School study concludes that nearly 45,000 annual deaths are associated with a lack of health insurance. There are two reasons people may be unable to afford insurance: Either they have insufficient income, or they entail such a high medical risk as to make insurance prohibitively expensive. The latter problem, which the individual mandate is designed to solve, results from insurers’ efforts to eliminate adverse selection, a phenomenon whereby high-risk individuals have more information on their health status than the insurer and are able to buy insurance at a premium based on a lower-risk group.
Demand for insurance is based on the consumer’s actuarially fair premium—the probability of a consumer incurring a medical expense multiplied by the size of the expense. Since healthy people have a low actuarially fair premium, they are less likely to buy insurance for any given price than sicker, or higher-risk, people. If insurers charged every customer the same premium based on the average risk of the entire population, the healthiest people would not buy insurance since their actuarially fair premium would be lower than that of the average citizen. The exit of the healthiest people from the market would necessitate an increase in the premium to compensate for the increased risk per person, which would induce the next healthiest group of people to exit the market, which in turn would require a further premium increase. This process, called a “death spiral,” would likely continue until health insurance became prohibitively expensive for everyone.
One of the principal ways insurers mitigate adverse selection is by tailoring policies to the health status of enrollees. This is accomplished through such strategies as medical underwriting, which sets premiums as a function of health status (i.e., lower-risk people pay lower premiums), and preexisting conditions clauses, which exempt the insurer from covering expenses related to conditions consumers had prior to purchasing insurance. The problem with such techniques is that they often make insurance prohibitively expensive for high-risk individuals.
To improve affordability, PPACA would ban medical underwriting and preexisting conditions clauses. The law replaces these devices as the antidote to adverse selection with the individual mandate, which requires most Americans to purchase health insurance beginning in 2014—premiums would (theoretically) remain affordable since low-risk people would not be allowed to drop their coverage without paying a fine. The hope is that the individual mandate, along with the expansion of Medicaid and subsidized insurance exchanges, will make insurance affordable regardless of income or health status.
While there are reasons to think the individual mandate would not completely eliminate adverse selection, its nullification would unequivocally doom the scheme by allowing low-risk citizens to drop out of the insurance market without penalty, leaving insurers without any means of getting around the adverse selection problem. An August 2010 study by MIT Professor Jonathan Gruber ’92 of the Center for American Progress estimates that repealing the mandate, absent any other changes, would increase the average premium by 27 percent in 2019 since more people would not buy insurance until they got sick, and that enrollment would increase by only seven million over the same period as opposed to the projected 32 million under the mandate.
With the individual mandate, there is a strong case that PPACA’s restrictions on medical underwriting and preexisting conditions clauses would improve access to care at a reasonable cost; without the mandate, these restrictions would clearly be more cost than benefit. If the Supreme Court strikes down the individual mandate in isolation, Congress should repeal the bans on medical underwriting and preexisting conditions clauses and devise a constitutionally sound way of improving affordability.
Peyton R. Miller ’12 is a government concentrator in Winthrop House. His column appears on alternate Wednesdays.